Analysis and Evaluation of the New Government`s First Tax Reform Bill for the Financial Sector

1. Introduction: A Tax Reform at the Crossroads of Growth and Equity—Can Market Trust Be Restored?

On July 31, 2025, the Ministry of Economy and Finance (MOEF) announced the new administration’s first annual tax reform package, presenting its vision as “a fair and efficient tax system for genuine growth.” The reform is structured around three policy objectives: (1) supporting Korea’s leap toward becoming a major economic power, (2) an inclusive tax system to stabilize livelihoods, and (3) strengthening the revenue base and rationalizing the tax system. Capital market–related measures were also included within this broader policy direction.

In particular, the government pledged substantial tax support for future strategic industries such as artificial intelligence (AI), autonomous driving, and defense technologies, while expanding tax relief for households with multiple children, small merchants, and small and medium-sized enterprises (SMEs)—signaling an intent to pursue a balance between growth and equity. In the capital market domain, the package also introduced a separate taxation regime for dividends from high-dividend companies, aiming to restore investment incentives and promote a more productive flow of capital.

The market’s initial reaction, however, was notably cold. On August 1—immediately following the announcement—the KOSPI plunged 3.88%, wiping out roughly KRW 100 trillion in market capitalization in a single day. This appears to reflect heightened concerns about liquidity pressures across the tax framework, especially as several measures were introduced simultaneously, including: (i) tightening the major-shareholder threshold for stock capital gains tax (from KRW 5 billion to KRW 1 billion), (ii) raising the securities transaction tax, and (iii) increasing corporate income tax rates by bracket. Together, these changes were widely interpreted as undermining market confidence.

The government maintains that the reform is grounded in the ability-to-pay principle and the “normalization” of tax burdens. In its view, the package is not merely aimed at securing short-term revenue through higher taxation on high-income individuals (including corporations), but rather constitutes a coherent adjustment to balance long-term economic dynamism with fiscal sustainability. MOEF expects the reform to increase tax revenue by more than KRW 8 trillion year-on-year, while also emphasizing a dual objective: improving incentives for high-dividend investment and guiding the capital market back toward “normalization.”

The problem is that these multi-layered policy objectives may be generating conflicts among policy instruments. For example, tighter capital gains taxation and higher transaction taxes increase investors’ costs and can impede portfolio reallocation, while the separate dividend taxation regime is presented as an incentive designed to offset such burdens. Yet the market has struggled to interpret this mixed signal: it remains unclear which incentive the government ultimately prioritizes, and the government has not provided a sufficiently clear answer—contributing to confusion.

Moreover, the separate dividend taxation regime itself presents a gap between expectations and effectiveness. Some analysts argue that its practical impact on investor incentives may be limited given a top rate as high as 35% and complex eligibility requirements. Ultimately, what matters is not only that policies are “structurally adjusted,” but how they are read as signals by the market. The current reaction suggests that the signal has not been strong enough to restore trust.

Against this backdrop, this report examines key elements of the 2025 tax reform package that directly affect the capital market—particularly the tightening of the major-shareholder threshold for capital gains tax and the introduction of separate taxation for dividend income—from multiple angles, including policy effects and market reactions. In addition, the report considers how the philosophy and priorities of tax policy should be redesigned from the perspective of reconciling tax justice with market vitality and building a virtuous cycle of capital inflows.

2. Current Status of Capital Gains Tax and Dividend Income Tax

As of 2024, capital gains tax recorded 100,145 cases, fluctuating slightly around the 100,000 level over the past five years. Meanwhile, both the transfer value and acquisition value increased substantially from 2020 to 2024—by approximately 2.4 times and 3 times, respectively. In 2024, the transfer value amounted to KRW 216.5 trillion and the acquisition value to KRW 180.1 trillion, while capital gains were about KRW 34.1 trillion. The total assessed tax (final tax liability) reached KRW 8.2 trillion in 2024—an increase of roughly KRW 2.4 trillion compared to 2020—though it decreased relative to 2023.

Dividend income tax, based on the most recent data available (2023), amounted to KRW 4.1 trillion—about KRW 1 trillion higher than in 2019—roughly half the size of capital gains tax. Except for a temporary spike in 2021, both dividend income and dividend income tax have shown a steady upward trend since 2019. By income bracket, the top 10% accounts for 91.8% of both dividend income and dividend income tax, while the top 20% accounts for about 4.8% (as reported in the original text). Overall, the top 20% of dividend-income earners bear more than 96% of total dividend income tax.

3. Tightening the Major-Shareholder Threshold for Capital Gains Tax: “Tax Justice” or “Policy Confusion”?
◩ Policy rationale: Restoring tax justice and ensuring consistency in the tax system

Through the 2025 tax reform package, the government announced that it would revert the major-shareholder threshold for stock capital gains tax from KRW 5 billion per listed company to KRW 1 billion. This measure restores the threshold applied under the Moon Jae-in administration, which MOEF frames as part of “restoring tax justice” and “ensuring tax-system consistency.”

The government argues—citing past episodes—that there is no proven direct correlation between the major-shareholder threshold and stock prices. For example, it points to data suggesting that stock prices rose when the threshold was tightened to KRW 1 billion in 2017, while stock prices declined when the threshold was loosened to KRW 5 billion in 2023. This explanation reflects the government’s view that the economic impact of capital gains tax is driven less by the threshold itself than by broader market returns and investor sentiment. Some analyses also argue that while selling pressure did occur during earlier tightening episodes (e.g., 2017 and 2019), it was more strongly influenced by market returns and macroeconomic conditions. Accordingly, ruling-party officials, including Policy Committee Chair Jin Sung-joon, have countered that claims of an immediate market crash caused by reverting the threshold “lack evidence.”

◩ The market’s sensitive reaction to tightening the threshold

Nonetheless, the market responded less to the government’s logic than to the policy “signal” itself. Immediately after the announcement, the KOSPI and KOSDAQ fell 3.88% and 4.03%, respectively, while foreign and institutional investors sold more than KRW 1 trillion in a single day. This suggests that the change was interpreted not as a technical adjustment, but as a sign that the government’s capital market stance may be shifting from “supporting stock prices” toward “strengthening the revenue base.” Within the securities industry, it is widely viewed as a signal of a broader change in direction.

◩ Questions over the realism and coherence of classifying KRW 1 billion holdings as “high-asset”

Because the major-shareholder threshold is asset-based, controversy has also emerged over whether classifying KRW 1 billion in stock holdings as “high-asset” is realistic or coherent—particularly in a context where average apartment prices in Seoul exceed KRW 1.4 billion, as noted by Rep. Lee So-young of the ruling party, who has played a leading role in tax reform debates. This point may weaken market confidence in tax fairness. Above all, the structural problem of year-end “avoidance selling” to evade major-shareholder status is likely to persist and recur, highlighting a gap between the policy’s stated purpose and its expected effects.

Some observers note that the package remains “pre-legislative” and could be adjusted during National Assembly deliberations. Historically, major-shareholder thresholds and financial tax provisions have sometimes been softened or deferred in legislative review. Even within the Democratic Party, criticisms have emerged—such as doubts over whether KRW 1 billion justifies classification as a major shareholder and skepticism about the size of the expected revenue gain—suggesting room for political adjustment.

If the government intends to encourage equity investment as an alternative to real estate investment in order to improve the structure of asset markets, capital gains taxation should be redesigned not as a short-term revenue instrument but as a system that creates incentives for long-term holding. Policy is a signal. Given that the market often reacts more to direction than to estimated effects, the government must now reestablish a credible balance between tax justice and capital market trust.

4. Separate Taxation of Dividend Income: A Limited Incentive Amid Questions of Effectiveness
◩ Policy rationale: Normalizing the capital market through dividend incentives

The 2025 tax reform package allows shareholders of high-dividend companies, under certain conditions, to opt for separate taxation of dividend income rather than comprehensive taxation. Specifically, separate taxation applies to dividend income received from listed corporations that meet one of the following criteria:

Cash dividends do not decline year-on-year and the dividend payout ratio is at least 40%; or

The dividend payout ratio is at least 25% and the dividend growth rate is at least 5% compared to the average over the previous three years.

Tax rates vary by income bracket: 14% for dividend income up to KRW 20 million; 20% for KRW 20 million to KRW 300 million; and 35% for amounts above KRW 300 million—substantially lower than the top marginal comprehensive income tax rate of 45%. The government argues that this will restore dividend-related incentives and expand asset inflows into the capital market.

However, the market has questioned the effectiveness of this regime. Critics argue that eligibility criteria are too restrictive, limiting the number of beneficiaries. In addition, with the top rate still at 35%, many analysts believe that the regime does not meaningfully reduce the effective tax burden for upper-middle investors or for institutional investors such as pension funds. Within the securities industry, prevailing assessments include: “it fell short of market expectations” and “the incentive is too weak to materially change corporate dividend policies.”

From the government’s perspective, the design does not contradict the core purpose of separate taxation: by limiting benefits to high-dividend firms, the regime aims to raise dividend payout ratios and reform asset allocation away from retention-centered practices over the long term. In particular, Korea’s dividend-avoidance practices and low price-to-book ratio (PBR) environment have historically undermined shareholder value and transparency in corporate governance. In that sense, separate taxation should be read not as simple tax cuts, but as a “signal” for structural reform.

◩ Effectiveness and market response: a confused incentive and a weakened policy signal

The key question, however, is how powerfully and clearly that signal is being conveyed. Given complex criteria and limited impact, the separate taxation regime has not been received as a credible incentive by the market. Moreover, because it is packaged alongside measures moving in the opposite direction—such as tighter capital gains taxation and higher transaction taxes—there are concerns that the dividend incentive signal is being distorted or diluted.

Ultimately, separate taxation of dividend income should serve not as a trigger for shrinking revenue, but as a catalyst for restructuring the tax base. Over the medium to long term, a virtuous cycle is conceivable—higher dividends → higher stock prices → higher transaction taxes and corporate taxes—expanding the overall revenue base. Achieving this, however, requires bolder incentive design and a clearer definition of the beneficiary scope. Only when a stable tax foundation enables pension funds and middle-tier investors to sustain long-term investment will the capital market begin to trust dividends as a reliable driver.

At the same time, the package exposes a structural limitation: “mixed policy messaging.” With tighter capital gains and transaction taxes implemented in the same package, the dividend incentive has not operated as a clear positive signal. In fact, it was reported that on August 1, 2025, market capitalization fell by KRW 116 trillion in a single day, and an analysis argued that—using a consumption elasticity coefficient cited by Nobel laureate Robert Shiller—this could translate into a reduction of KRW 8.1 trillion in private consumption capacity.

Notably, this figure matches exactly the size of the first-round consumption coupon budget separately allocated by the government for livelihood recovery. In other words, while one part of the policy package aims to stimulate consumption, another part appears to deliver a tax signal that could suppress consumption—an internal contradiction. Given that the eligibility requirements are stringent and the top rate remains as high as 35%, it is difficult to see the regime as a sufficiently persuasive incentive to reverse market sentiment.

In practice, some market participants have described the regime as “a formal appeasement measure rather than a genuine market-stabilization tool.” Even if one agrees with the structural reform objective of correcting retention-centered corporate governance, a regime that fails to provide effective incentives may deliver limited results beyond political symbolism. Separate taxation is not merely a numerical adjustment; it presupposes the restoration of expectations and trust. A design that neglects these psychological and sentiment-driven elements risks being offset by broader, anti-market signals.

5. Conclusion and Recommendations: Resetting Tax Policy to Restore Market Trust
◩ The paradox of tax policy: confusion driven by distorted policy signals

Despite the government’s stated principles—tax fairness and strengthening the revenue base—the 2025 tax reform package faced intense backlash immediately after its announcement, not only from markets and the political sphere but even from within the ruling party. The market’s consistent assessment is that reverting the major-shareholder threshold and delivering an underwhelming separate dividend taxation regime imposed an excessive shock on the capital market. Following the simultaneous plunge of the KOSPI and KOSDAQ, “policy trust” itself appears fundamentally shaken.

MOEF acknowledged the seriousness of the situation, stating that “the Tax Policy Bureau and the policy line are closely monitoring market reactions.” This implies that some provisions could be adjusted during National Assembly deliberations. Yet the fact that KRW 116 trillion in KOSPI market capitalization evaporated and potential private consumption contracted by more than KRW 8 trillion in a single day underscores—by negative example—how consequential the “signaling function” of tax policy can be.

Such political conflict and confusion widen the gap between policy intent and market interpretation. The government frames the tightening of the major-shareholder threshold and the introduction of separate taxation for high-dividend income as “balancing equity and growth,” while investors, firms, and financial markets interpret it as “a mixed signal of tax hikes and regulation.” As a result, a short-term objective of revenue expansion may end up destabilizing the long-term tax base and market foundation itself.

Moreover, the fact that the package was announced without sufficient ruling party–government coordination highlights how critical political coherence and policy consistency are in the highly technical domain of tax design. The present confusion is not merely about a few statutory clauses; it is a crisis of overall persuasiveness and social acceptability. Markets react to direction more than to numbers, and to signals more than to details. To achieve both tax justice and efficiency, restoring the consistency and credibility of policy signals must come first.

◩ Reestablishing policy coherence: restoring a consistent philosophy of taxation

The 2025 package produced interpretive confusion by delivering a dual signaling system—pairing an incentive (separate taxation for high-dividend income) with a restrictive measure (tightening the major-shareholder threshold). Although the government promoted “a fair and efficient tax system” as its guiding principle, post-announcement indicators and political reactions suggest that the principle was not communicated effectively to the market.

This is particularly concerning because the core function of tax policy—building trust among economic actors and designing incentive structures—appears distorted. Contraction in asset markets can generate losses far exceeding short-term revenue gains, and this episode reconfirmed how a single policy signal can destabilize market expectations and sentiment.

Accordingly, future tax design requires a shift in approach. When tax policy simultaneously pursues growth inducement and equity, it must establish clear priorities and a temporal sequencing among instruments. If the government proclaims capital inflows as a goal while simultaneously strengthening taxation, the market cannot determine which direction should guide its expectations. Tax policy should reward investment and provide predictable rules. Only with such coherence and consistency will market participants trust the government’s signals.

◩ Recalibrating the major-shareholder threshold: reflecting asset realities and rationalizing the standard

The current major-shareholder threshold defines taxable status based solely on the amount of assets held, which does not sufficiently reflect realistic asset distributions or investment behavior. In particular, KRW 1 billion is comparable to the price of a single apartment in the Seoul metropolitan area. Classifying individual investors as high-net-worth solely on this basis and imposing a high capital gains tax lacks persuasiveness even in terms of tax equity. A regime that determines taxable status by holding value alone—regardless of actual control—undermines both rationality and legitimacy, while generating unpredictability and distrust among market participants.

Therefore, a taxation framework should incorporate additional factors such as ownership ratio, holding period, and the presence of substantive control. On that basis, the government’s proposal to revert the threshold should be excluded during the legislative process. If such an unrealistic standard is maintained, structural losses—erosion of capital market trust and contraction of investment—may far exceed any short-term revenue rationale.

◩ Expanding incentives through separate taxation: normalizing the capital market by strengthening market-based inducements

A separate taxation regime for dividend income can serve as an institutional foundation to increase corporate payout ratios and enhance the soundness of capital structures over the long term. In particular, an amendment bill proposed in April by Rep. Lee So-young drew attention as an attempt to address structural limits of comprehensive taxation. Under the current framework, when dividend and interest income exceeds KRW 20 million annually, it is aggregated into comprehensive income and taxed at progressive rates up to 45%. This structure weakens incentives for dividends and entrenches distorted distribution practices that favor internal retention by management.

To address this, Rep. Lee proposed a bill that would apply a single separate tax rate of up to 25% (local tax excluded) to dividend income from listed companies with a dividend payout ratio of at least 35%. The objective is not simple tax reduction but a structural redesign of the tax framework to encourage higher dividends and restore market liquidity. The bill reportedly includes mechanisms to minimize revenue loss while still providing meaningful incentives: it projects a short-term revenue reduction of KRW 250 billion, but also suggests that over the long term, expanded transaction and corporate tax revenues could increase overall tax receipts by trillions of won.

Ultimately, separate taxation of dividend income is a strategic tool that can expand the base of retail shareholders and raise corporate value through a virtuous cycle—thereby advancing both capital market activation and tax-base expansion. Rather than limiting the regime through narrow criteria and a high top rate, the scope should be expanded to cover a broader set of companies, and the rate structure should be redesigned to deliver a perceptible reduction in effective tax burdens. In particular, the design should prioritize “market inducements,” not “political symbolism,” so that pension funds and middle-tier investors can reliably expect stable long-term dividend income.

Separate taxation is a core architecture for restoring capital market trust. More than marginal rate adjustments, the decisive factor is coherence in incentive design. What is urgently needed is not a limited and ineffective tax cut, but a transition to a separate taxation system that can present a clear direction to the capital market.

◩ Improving political and administrative design processes: communication with the market must come first

Announcing tax policy unilaterally without coordination between the ruling party and the government undermines both policy acceptance and market trust. Because tax policy requires highly sophisticated design, its process must be more transparent and systematic, and market communication must be sufficiently secured before announcement. Moreover, releasing a reform package when even the ruling party cannot align on a consistent position damages not only administrative credibility but also political legitimacy. Going forward, tax policy must be accompanied by design and public deliberation that fully consider market reactions and predictability.

Korean version: https://www.cfe.org/20250805_27942